Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over the mechanic's liens?

Yes. See Code of Alabama, Revised 1975; Section 35-11-211. It provides that when the mortgage is recorded prior to the commencement of the building operation and the building is inseparable from the land, the mortgage will have priority over mechanics liens. The date of the recording of a mortgage and the date of the furnishing of materials by a materialman control the determination of the priority between the mortgage and the materialman's lien. To have priority, the burden is on the materialman to prove that the work was commenced before the execution of the mortgage.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Yes and No. The obligatory/optional distinction in mortgages with future advances affects lien priority significantly in Alabama. Optional future advances will not be given priority over subsequent liens especially when the senior lienor has notice of the junior lien. Obligatory disbursements made in good faith even with actual notice of an intervening lien maintain the priority of the mortgage when filed. Optional advances are subject to a loss of priority to intervening liens if the mortgagee has actual knowledge of them; "constructive notice under the recording statutes in deemed insufficient, and the mortgagee must have actual knowledge of the intervening encumbrance before the priority of a future advance is denied." The statutes do not address this issue. Pending Disbursement clauses are used.

If priority is lost, can it be regained?

No. See Code of Alabama 35-11-210 (1975). The lien in favor of the mechanic or materialman is said to attach and be created at the time of the initial contribution of the labor or materials that is the subject of the lien, though the action to perfect and enforce the lien may not be brought until six months later. Once the verified statement of lien is filed in the probate court and all other steps are taken to perfect and enforce the lien, the lien is said to relate back and have priority over all subsequently created liens. Without a determination of priority by adjudication the lien has no value. Once a judicial determination is made that the M/M lien claimant has priority, then the mortgage priority is lost to that particular claimant but not as to the entire project. Each lien claimant incepts his own lien with proper notice.

Is there a difference between on-site and off-site work?

Preparation of building plans by an architect may not give rise to a lien but an actual construction inspection may give rise to such a lien.

Alabama Code Section 35-11-210 gives a lien to every mechanic, person, firm or corporation who shall perform any work or labor or furnish any material.......for any building or improvement on land........ The materials furnished or labor contributed must have been incorporated into an improvement or building and become a part of the realty. In order for labor on become a perfectible lien it must be shown that the labor was performed to something that has attached to and become a part of the realty to the lien claimed.

The clearing and grading of unimproved land for the erection of structures will give rise to a lien. Surveyors and Architects may be entitled to a lien. It has been held that a surveyor who stakes out land to be subdivided was not entitled to a lien.

Is priority the same for all contractors and subcontractors on the same project?

No. Alabama Code Section 35-11-210. Alabama Code 35-11-210 provides for two types of M/M liens: a full price lien and the unpaid balance lien. There must be a contract between the lien claimant and the owner in order to establish a full-price lien. The claimant must give notice that he plans to supply materials to the contractor or subcontractor. When the notice to owner is sent and the owner does not object, the owner may be personally liable for the full price if the owners contractor or subcontractor fails to pay the supplier. The "unpaid balance lien" arises if there is no contract between the lien claimant and the owner. The unpaid balance may be enforced if there is a balance due from the owner to the original contractor. If one claimant delivers materials before the recording of the construction mortgage and another incepts his lien subsequent to the recording of the mortgage, only the former is entitled to priority where each has contracted directly with the owner.

The "unpaid balance lien" arises in instances where the lien claimant gives notice to the owner that an unpaid balance is due and owing from the original contractor to the claimant under their contract. When proper notice is given to the owner, the claimant has a lien on the land of the owner to the extent of any unpaid balance due the original contractor under his/her agreement with their owner. The "unpaid balance lien" is available where there is no contract between the claimant, his agent or architect, and where no precontribution notice was given by the claimant under Alabama Code Section 35-11-210 (1975).

The supplier or laborer is required to give a precontribution notice to the owner that specifies the materials and price of same in order to claim a "full price lien". No notice to the owner is required of an original contractor (one who contracts directly with the owner).

Time Limits

What are the time periods for recording lien claims by original contractors and subcontractors?

Alabama Code Section 35-11-213 provides that a "Verified Statement" of lien must be filed in the Probate Judges Office in the county where the property is situated. A statutory form is provided in the Code. Generally, an "Original Contractor" must record their Verified Statement within six months. Day Laborers and journeymen must record within thirty days. All other claimants must record within four months of the date of their last contribution. The statutory time requirements for filing the Verified Statement is a statute of limitations.

After what period of time can you waive a mechanics lien if no suit is filed?

Alabama Code Section 35-11-210 et.seq. provides that an action to perfect and enforce a lien must be brought in the county or judicial division, in which the land lies, within six months of the date the indebtedness was due under the contract to supply. The is lien lost if there is a failure to timely file a suit to enforce the lien.

Removing or Waiving Liens

Is there a statutory procedure for affidavits of completion or notices of completion?

No. Architects typically provide completion notices. Certificates of occupancy are issued by local governmental bodies.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

Yes. Alabama Code 35-11-233 provides for a "transfer" of the lien to a sum of money to be deposited with the court or a bond upon demand by the owner of the land.

Can the original, general or subcontractors by contract or waiver agreement subordinate or waive Mechanic's Liens by general contractor and/or subcontractors?

Yes. Statutory authority is not available.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?

No. If the Verified Statement of Lien is timely recorded (even though no action has commenced to perfect and enforce the lien), the purchaser is bound by the recording statutes imputing constructive notice (Section 35-11-213 Code of Alabama 1975). A purchaser may be put on notice even where no verified statement is filed as where work is in process or on a recently completed structure; the purchaser takes subject to the liens.

Title Company Requirements

What are the customary requirements for issuing Loan Policies on Construction Loan Mortgages?

On one-to-four family residential residences the Stewart Title Guaranty Company standard lien waiver is used when no liens have been filed against the property at time of closing the permanent or "end" loan.

Where large commercial projects are insured an inspection of the situs of the property shall be made to determine if there is "visible" construction has commenced. If construction has commenced then the General Contractor, Original Contractors and Subcontractors are required to execute a subordination agreement as to any work performed or labor furnished prior to execution and recording of the mortgage. If no work has commenced then an affidavit is secured from both the General Contractor and owner that no work has commenced or material furnished for and lien waivers secured at closing.

Is it customary to add a "pending disbursements" clause or mechanics lien exception in the loan policy insuring a construction loan mortgage?

Yes. For large commercial loans where the lender requests mechanic and materialmen's (M/M) lien coverage and the M/M lien exception is removed from the commitment and policy a pending disbursement clause is inserted (below). On one-to-four family construction loans the M/M lien exception on Schedule B is not removed; pending disbursement clause is required by Company underwriting requirements.

PENDING DISBURSEMENT CLAUSE

In General

The general "pending disbursement clause" reads as follows:

"Pending disbursement of the full proceeds of the loan secured by the Mortgage herein insured, this policy insures only to the extent of the amount actually disbursed in good faith but increases as each disbursement is made, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan the title must be continued down to such time for possible liens, including Mechanic's Liens, and other objections, intervening between the date hereof and the date of such disbursement."

Also subject to any bulletins relating to mechanic’s liens.